Active fund managers stand to lose out on more than £420 million in revenues a year from local government pension schemes if recommendations from a cost-saving review are embraced.

The recommendations, if implemented, would mean that revenues big enough to sustain a mid-sized manager the size of F&C Investments nearly twice over would vanish from active managers as funds switch into lower-cost passive products such as exchange-traded funds.

Publication of the review last week confirmed an exclusive report in Financial News in January and has ignited a new debate on the value of active fund management.

The review, written by consultants Hymans Robertson, aims to improve efficiency in the 89 local government pension schemes in England and Wales, which manage £178 billion on behalf of 4.5 million members. The saving would be made up of £230 million from the greater use of passive investment funds for listed equities and bonds and £190 million from reducing costs resulting from the buying and selling of assets in the portfolio, known as portfolio turnover costs.

Linda Selman, head of local government pensions scheme investments at Hymans Robertson, said: “It’s quite important to think about the number of fund managers the [local government] funds currently employ. There are a lot of them, which means that when you average out their performance, it adds no value in aggregate.”

The Investment Management Association, which represents fund managers it would make further comment “in due course”.

The report was also criticised for not addressing key issues. Andrew Kirton, European/Pacific investments leader at Mercer, said the report risked taking attention away from the most serious issue in local government pension provision – the estimated deficit of more than £70 billion – which meant a fundamental review of benefits or contributions was required.

He added: "“Many funds are exposed to considerable interest rate and inflation risks, which pose a significantly bigger threat to funding status than the issues the government has chosen to address.”

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Tony Deane, chairman of the Wiltshire Pension Fund, which manages more than £1.3 billion for 31,500 members, said he did not believe that a complete allocation to passive strategies was the best solution.

He said: “We need some uplift in our assets and I don’t think we are going to get that from tracker funds.”

Correction: An earlier version of this article incorrectly stated that The Investment Management Association had commented on funds' exposure to interest rate and inflation risks. This is incorrect. The quote was actually from Mercer's Andrew Kirton and the piece has been updated to reflect this.